Managing monopolies and dominance in the Net age

Guest blogger Mike Shatzkin is Founder and CEO of The Idea Logical Company, where he has focused on supply chain and digital change issues since 1979. Mike has spoken at and organized publishing industry conferences all over the world. He recently launched The Shatzkin Files blog. One of Mike’s several books, The Ballplayers, forms the core of BaseballLibrary.com.

Our thinking about “monopoly” may need to be recast in the Internet age. This is a complicated question to consider and we need to start gathering some good minds around it.

Network effects were noticed before there was an Internet. Both the phone company and the electric company were networks, and it became clear about a century ago that everything worked better for everybody if they WERE monopolies and everybody was hooked up to the same network, not competing ones. So phones and electricity became regulated monopolies, with prices and other behavior, including mandated service levels, controlled. Whether because of a changing ethos or because things became more complicated, or both, “competition” has been introduced in both spheres over the past two or three decades. With debatable results.

Amazon’s dominance — which is not a monopoly but which certainly looks like unassailable hegemony in the world of online bookselling — can be largely attributed to brilliant execution and maintaining a tight focus on serving the customer. But part of their success at eliminating meaningful competition for online book sales has to do with the nature of the Internet. Online likes one winner in many spaces because it serves the users better NOT to fragment aggregations. If Amazon’s reader reviews were spread over 1000 web sites, they wouldn’t be as useful to the consumers. And their recommendation engine thrives on data; fewer customers would mean less helpful recommendations for those customers remaining, and the concentration at Amazon means less useful recommendations come from all their retailing competitors. This is an edge that may not stay with the retailer forever, though, because the playing field for information about books is being leveled by social networking sites. That’s why Amazon is investing in them.

This tendency to concentration makes it urgent for publishers to get into niches and start trying to own them while they have legacy advantages. If the history of the Net so far is any guide, each information and interest niche will end up being owned by a very small number of players; often it will boil down to one. We seem to have been pretty fortunate with the dominant players (perhaps we should call them “monopoly threats”) that have emerged so far, among them: Amazon, Google, ebay, Craigslist, wikipedia, and a now-emerging Facebook. They’ve executed well and kept their eye on the stakeholders they serve. They, so far, have been more benign dominators than were Microsoft and AOL, two big winners on the previous go-round.

But government is going to have to start thinking through public policy toward what will be an increasing number of dominant players in many niches. “Breaking them up” will seldom be a sensible answer: they often became monopolies because of natural causes and effects and if they were broken up, they’d recreate themselves (as the phone companies have been doing.) But leaving things to the market when there is no market is just trusting to luck.

The futility — or self-defeating nature — of “breaking them up” is obvious if we consider the possibility that Facebook or LinkedIn develops a dominant or near-monopoly position. The success of both sites, and their value to their users, is directly related to the number of people using them.

So breaking up a monopoly or dominant position built on the competitive advantage of a robust database tied to network effects would damage the users. That’s certainly not the objective for society trying to control monopolies.

One possibility is that we should allow combinations of suppliers or users when they are faced with a monopoly. Another is that stakeholders should be identified and, somehow, through mediation or legislation, their legitimate interests should be defined and somehow protected. But we have enough understanding of the Net and network effects now to see that our legacy thinking about monopolies, how to live with them and how and whether to manage them, may need some reconsideration. And we need some people who are NOT lawyers or economists joining those who are in the conversation.

A recent mailing list discussion about this produced a wide range of opinions. On one extreme is the notion that all market dominance is bound to be exploited and the government’s inability or unwillingness to control Microsoft is held up to have allowed damaging predatory behavior (pointing, first of all, to the demise of Lotus and OS/2.) On the other side are those who say the market and the rapid changes fostered by technology are all the control we need. That side too, can point to Microsoft and its current challenges as proof that no government hand is needed, even in the Internet age.

Certainly, one can see the possibility that Google will be challenged by vertical search (and just plain vertical sites) and that Amazon’s dominance in physical book distribution online will be hard to extent to ebook distribution (a topic I will explore further in an upcoming post on my own blog).